Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX, MADHYA PRADESH ETC.
Vs.
RESPONDENT:
M/S. STRAW PRODUCTS LTD., BHOPAL
DATE OF JUDGMENT:
03/12/1965
BENCH:
SIKRI, S.M.
BENCH:
SIKRI, S.M.
SUBBARAO, K.
SHAH, J.C.
CITATION:
1966 AIR 1113 1966 SCR (2) 881
CITATOR INFO :
R 1966 SC1117 (5)
OPN 1967 SC1552 (6)
R 1968 SC 579 (1,11,12)
E 1969 SC 78 (18)
RF 1973 SC2117 (5)
R 1975 SC 797 (30,35)
ACT:
Taxation Laws (Merged States Removal of Difficulties) Order,
1949 Paragraph 2 as amended by Taxation Laws (Merged States)
(Removal of Difficulties) (Amendment) Order
1962--Explanation added to Paragraph 2--Meaning of term
"depreciation actually allowed" retrospectively amended by
Explanation--Effect and validity of 1962 Order.
HEADNOTE:
The respondent company, incorporated in 1939 in the
erstwhile State of Bhopal, was exempted under an agreement
with the Ruler from taxation under the Bhopal Income-tax Act
for a period of ten years which ended on October 31, 1948.
After the merger of the State with India in 1949 the company
became liable to assessment under the Indian Income-tax Act,
1922. The Taxation Laws (Merged States) (Removal of
Difficulties) Order, 1949 provided in Paragraph 2 that in
computing depreciation allowance all depreciation "actually
allowed" under the relevant law of a merged State shall be
taken into account. Accordingly the Income-tax Officer in
making assessments for the years 1952-53 and 1953-54 on the
respondent company allowed depreciation on the original cost
of the assets. However on the decision of the Bombay High
Court in Dharangdhara Chemical Works Ltd. (IT. Reference
No. 60 of 1956) coming to his notice he recomputed the
depreciation allowable to The company for the, said years
4952-53 and 1953-54 by taking into account the depreciation
that would have been allowed to the company under the Bhopal
Income-tax Act if it had not been exempted from the
’assessment under the said Act. The order of the Income-tax
Officer was reversed by the Appellate Assistant Commissioner
who held that depreciation which had never been allowed
could not be taken into consideration. The Tribunal in
appeal, and the High Court in reference took the same view.
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Subsequent to the High Court’s judgment the Taxation Laws
(Merged States) (Removal of Difficulties) (Amendment) Order,
1962 was passed which added an Explanation to Paragraph 2 of
the 1949 Order By this Explanation it was said that the
expression "all depreciation actually allowed under any laws
or rule& of a merged State" meant and shall be deemed always
to have meant that in cases where income had been exempted
from tax under any laws or rules in force in a merged State
or under any agreement with a Ruler, the depreciation that
Would have been allowed had the income not been so exempted.
In appeal to this Court against the High Court’s judgment
the Revenue contended : (1) The expression ’actually allowed
under any laws or rules of a merged State’ occurring in
paragraph 2 of the 1949 Order meant depreciation allowable
under the provisions of the said laws or rules. (2) The 1962
Order which explained the expression ’actually allowed’ to
mean the depreciation that would have been allowed had the
income not been exempted by the Ruler was retrospective
because it contained the words ’shall be deemed always to
have meant’, and in view of this Explanation the Income-tax
Offier’s order was right. Because the
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1962 Order came up for consideration for the first time in
this Court the respondent was allowed to challenge it on
various grounds.
HELD : (i) The High Court was right in its view that the
expression actually allowed’ in the 1949 Order is
unambiguous and connotes the idea that the allowance was
actually given effect to. [887 E]
(ii)The Explanation added by the 1962 Order however
retrospectively changed the meaning of the expression
’actually allowed’ and the Revenue was entitled to rely on
it. Applying the 1962 Order to the facts of the present
case it was clear that the correct basis for computing the
written down value of the depreciable assets for the
relevant period was the one adopted by the Income-tax
Officer. [890G]
(iii)The 1962 Order could be taken into consideration by
this Court although it was not in existence when the High
Court answered the reference. The question referred to the
High Court was of sufficient amplitude to include a
discussion of the amendments made retrospectively in the
Taxation Laws (Merged States) (Removal of Difficulties)
Order, 1949.[890 F]
Commissioner of Sales-tax, U.P. v. Bijli Cotton Mills
Hathras, [1964] 7 S.C.R. 383; A.I.R. 1964 S.C. 1594,
applied.
(iv)The respondent could not be allowed to raise the
question whether the 1962 Order was ultra vires because of
the, decision of this Court in Venkataraman’s case. [889 A]
K. S. Venkataraman v. State of Madras, [1966] 2 S.C.R.
229.
(v)The respondent could not claim that the 1962 Order did
not apply to it on the ground that no income-tax being
payable by it, it was not an assessee. The definition of
’assessee’ must mean a person by whom income-tax is payable
under the Bhopal Act. If it had not been for the agreement
with the Ruler the respondent would have been liable to pay
tax. [889 H]
(vi)There was no force in the respondent’s contention that
the 1962 Order was not retrospective and did not apply to
assessments made before it came into force. The terms of
the Order are plain and if it is deemed as directed by the
Order, that the expression ’actually allowed under the laws
or rules of a merged State’ should have the meaning ascribed
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to it by the Explanation, as from December 3, 1949, when the
Taxation Laws (Merged States). (Removal of Difficulties)
Order, 1949 came into force, the Explanation must apply to
the assessments for the years 1952-53 and 1943-54. [890 B-C]
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 893 and
894 of 1964.
Appeals by special leave from the judgment and order dated
the August 22, 1961 of the Madhya Pradesh High Court in
Misc. Civil Case No. 304 of 1960.
A.V. Viswanatha Sastri, N. D. Karkhanis, B. R. G. K. Achar
and R.N. Sachthey, for the appellant.
S.T. Desai, Mahinder Narain, Rameshwar Nath, S. N. Andley
and P.L. Vohra, for the respondent.
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The Judgment of the Court was delivered by
Sikri, J. These appeals by special leave are directed
against the judgment of the High Court of Madhya Pradesh in
a reference made to it by the Income Tax Appellate Tribunal,
under S. 66(1) of the Indian Income Tax Act, 1929,
hereinafter referred to as the Act. The Tribunal referred
the following question to the High Court :
"Whether, on the facts of the case and having
regard to the provisions of paragraph 2 of the
Taxation Laws (Merged States) (Removal of
Difficulties) Order, 1949, and clause 8 of the
Agreement made on 20th September, 1938,
between the assessee and the State of Bhopal,
the correct basis for computing the written
down value of the depreciable assets as at 1-
11-1948 is the one which is adopted by the
Income Tax Officer or the one adopted by the
Appellate Assistant Commissioner?"
The relevant facts are these. The respondent, M/s Straw
Products Ltd., Bhopal, hereinafter called the assessee, is a
public limited company. It was incorporated in the
erstwhile State of Bhopal in 1939 and was given the
certificate of commencement of business on May 30, 1939. On
September 20, 1938, the assessee entered into an agreement
with the Government of Bhopal. Under the agreement the
assessee obtained certain concessions and facilities. The
assessee not only got exclusive licence to manufacture card-
board articles of all kinds but also got land on lease on
favourable terms. It was also exempted from payment of
customs and other duties payable to the municipality.
Clause 8 of the agreement is relevant for the purpose of
these appeals and is in the following terms:
"8. Subject to and so far as the State shall
not become or become obliged by any Instrument
of Accession or Supplementary Instrument under
the Government of India Act, 1935, in respect
of any Federal Taxation, it is hereby agreed
as follows:-
(a)During the period of I 0 years from the
date on which the said Company takes over the
land for its business purposes the said
Company shall not be liable to pay any sum by
way of taxation to the State.
It is common ground that this agreement was acted upon and
for a period of 10 years the assessee was not called upon to
submit any returns of income and no assessment was made on
the assessee under the Bhopal Income Tax Act. This period
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of ten
884
years expired on October 31, 1948. On August 1, 1949,
Bhopal merged in India and was formed into a Chief
Commissioner’s Province.
For the assessment year 1949-50, the assessee was assessed
under the Indian Income Tax Act, 1922, on the total income
of the period November 1, 1948 to December 12, 1948, as the
assessee made up its accounts on the 31st December each
year. For the assessment years 1952-53 and 1953-54, the
assessment years which are the subject matter of this
reference (previous years Calendar years 1951 and 1952,
respectively), the Income Tax Officer, by orders dated
November 27, 1952 and September 30, 1953, allowed
depreciation on the machinery, buildings and other assets
owned by the assessee on the basis of the original cost,
i.e., the cost paid in 1939. Subsequently noticing a report
in the Times of India, dated March 15, 1957, giving the view
taken by the Bombay High Court in the case of Dhrangadhara
Chemical Works Limited(1), the Income Tax Officer initiated
action under S. 34(1) of the Act in respect of these two
assessment years. In the Dhrangadhara Chemical Works(1) case
the Bombay High Court had held that the written down value
on the opening day of the account period for which
assessment is to be made under the Indian Income Tax Act
should be taken at the actual cost, less the depreciation
which could have been claimed under the Indian Income Tax
Act, 1922. After hearing the assessees objections, the
Income Tax Officer by his order dated March 4, 1958, held
that "the written down value of the assets of the company
will have to be redetermined as on 1-1-1951. This would be
done by first determining the written down value of assets
as on 1-11-1948 under the Bhopal Income Tax Act. From the
written down values so ascertained, all depreciation
actually allowed till 31-12-1950 would be deducted. The net
figures thus arrived at would show the written down value of
the assets in the beginning of the assessment year 1952-53."
Consequently, the depreciation of Rs. 2,71,961 allowed in
the original assessment for 1952-53 was reduced to Rs.
1,29,883 and for the assessment year 1953-54 the original
depreciation allowance of Rs. 2,87,285 was reduced to Rs.
1,72,673.
The Appellate Assistant Commissioner, disagreeing with the
Income Tax Officer, held on appeal that the assessee had not
been allowed excess depreciation allowance as per the
original assessment and there was no basis for initiating
proceedings under s. 34. He was of the view. that the
expression "actually allowed" could
(1) Income Tax Reference No. 60 of 1956; judgement dated
February 14, 1957.
885
not imply depreciation allowed by a mental phenomenon. The
Appellate Tribunal upheld the order of the Appellate
Assistant Commissioner and directed the computation of the
allowance on that basis. On a reference the High Court by
its judgment dated August 22, 1961, answered the question as
follows :
"In the circumstances of this case the correct
basis for computing written down value of
depreciable assets of the company is the one
adopted by the Appellate Assistant
Commissioner."
On August 20, 1962, in exercise of the powers conferred by
s. 6 of the Taxation Laws (Extension to Merged States and
Amendment) Act, 1949 (LXVII of 1949) the Central Government
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made the following order to amend the Taxation Laws (Merged
States) (Removal of Difficulties) Order, 1949. The order
was called the Taxation Laws (Merged States) (Removal of
Difficulties) (Amendment) Order, 1962 (hereinafter referred
to as the 1962 Order). The relevant part of part 2 is in
the following terms :
.lm15
" 2. In the Taxation Laws (Merged States) (Removal of
Difficulties) Order, 1949, after the proviso to paragraph 2,
the following Explanation shall be inserted, namely:
the "Explanation.-For the purpose of this paragraph,
expression ’all depreciation actually allowed tinder any laws
or rules of a Merged State’ means and shall be deemed always
to have meant(a)........
(b)in cases where income had been exempted from tax under
any laws or rules in force in a Merged State or under any
agreement with a Ruler, the depreciation that would have
been allowed had the income not been so exempted."
Paragraph 2 of the Taxation Laws (Merged States) (Removal of
Difficulties) Order, 1949, reads as follows :
"2. Computation of aggregate depreciation
allowance and the written-down value.-
In making any assessment under the Indian
Incometax Act, 1922, all depreciation actually
allowed under any laws or rules of a merged
State relating to incometax and super-tax,
shall be taken into account in computing the
aggregate depreciation allowance referred to
886
in sub-clause (c) of the proviso to clause
(vi) of subsection (2), and the written-down
value under clause (b) of sub-section (5) of
section 10 of the said Act
Provided that where in respect of any asset,
depreciation has been allowed for any year
both in the assessment made in the merged
State and in British India, the greater of the
two sums allowed shall only be taken into
account."
This order was made in exercise of the powers conferred by
:S. 8 of Taxation Laws (Extension to Merged States)
Ordinance, 1949 (XXI of 1949). The Ordinance, which applied
to Bhopal, by S. 3(1) extended inter alia the Indian Income
Tax Act, 1922, and all rules and orders made thereunder to
all the merged States, and by S. 3 (2) the Indian Income Tax
Act, 1922 and the rules and orders made thereunder were
extended and brought in force in all the merged States on
April 1, 1949. Section 8 of the Ordinance provided as
follows :
"If any difficulty arises in giving effect to
the provisions of this Ordinance, the Central
Government may by order make such provisions,
or give such directions, as appear to it to be
necessary for removal of the difficulty."
The Taxation Laws Amendment (Second) Ordinance, 1949 (No.
XXXIII of 1949) inter alia made various amendments in the
Indian Income Tax Act, 1922.
These Ordinances were replaced by the Taxation Laws (Exten-
sion to Merged States and Amendment) Act, 1949 (LXVII of
1949). Section 3 of this Act is similar to s. 3 of the
First Ordinance. Section 6, which took the place of S. 8 of
the First Ordinance, reads as follows:
"If any difficulty arises in giving effect to
the provisions of any Act, rule or order
extended by section 3 to the merged States,
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the Central Government may, by order, make
such provision or give such directions as
appear to it to be necessary for removal of
the difficulty."
Section 34 repealed Ordinance XXI of 1949 and Ordinance
XXXIII of 1949, but by sub-s (2) inter alia provides as
follows
" ... anything done or any action taken in the
exercise of any power conferred by any of the
Ordinances referred to in this section shall
for all purposes be deemed to have been done
or taken in the exercise of
887
the powers conferred by this Act as if this
Act were in force on the day on which such
thing was done or action was taken."
Mr. A. V. Viswanatha Sastri, the learned counsel for the
Revenue, urges before us that the High Court was wrong in
answering the question in favour of the assessee. He urges
that the expression "actually allowed under any laws or
rules of a merged State" occurring in para 2 of the Taxation
Laws (Merged States) (Removal of Difficulties) Order, 1949,
meant allowable under the provisions of the said laws or
rules. He says that if the income of an assessee is
exempted from taxation for a certain number of years, the
assessee must be deemed to have claimed depreciation and
deemed to have been allowed depreciation according to the
provisions of the said laws or rules. He further says it
does not matter whether the assessee made a claim or not
because it is fair that when the Indian Income Tax Act is
applied the assessee should be brought at par with the
assessees who had suffered taxation under the Act.
We are unable to give such an artificial meaning to the
expression "all depreciation actually allowed under any laws
or rules", and we agree with the High Court that the
expression "actually allowed" is unambiguous and connotes
the idea that the allowance was actually given effect to.
If it was intended to include any allowances which are not
actually allowed then the Central Government would have
added a deeming provision as the Legislature did in the
Explanation to s. 10(5) of the Act.
In the alternative, he relies on the 1962 Order set out
above. He says that the order has explained the expression
"actually allowed" to mean the depreciation that would have
been allowed had the income not been exempted under an
agreement with a Ruler. He further says that this order is
retrospective because it expressly says that the expression
"all depreciation actually allowed under any laws or rules
of a merged State shall be deemed always to have meant."
Mr. Desai, the learned counsel for the respondent, objects
to this order being relied on by Mr. Sastri on various
grounds. He further says that on a true interpretation of
the order it does not apply to the case of the assessee.
The question then arises whether we are entitled to take
into consideration the 1962 order. The learned counsel had
cited various cases and has argued that this being an Appeal
by special leave from a reference, we should not take the
order into consideration. It is unnecessary to refer to the
cases because the point is concluded by a judgment of this
8Sup C 1166-10
888
Court in Commissioner of Sales Tax, U.P. v. Bijli Cotton
Mills, Hathras(1). Shah, J., speaking for the Court
observed as follows:
"Undoubtedly the Tribunal called upon to
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decide a taxing dispute must apply the
relevant law applicable to a particular
transaction to which the problem relates, and
that law normally is the law applicable as on
the date on which the transaction in dispute
has taken place. If the law which the
Tribunal seeks to apply to the dispute is
amended, so as to make the law applicable to
the transaction in dispute, it would be bound
to decide the question in the light of the law
so amended. Similarly, when the question has
been referred to the High Court and in the
meanwhile the law has been amended with
retrospective operation, it would be the duty
of the High Court to apply the law so amended
if it applies. By taking notice of the law
which has been substituted for the original
provision, the High Court is giving effect to
legislative intent and does no more than what
must be deemed to be necessarily implicit in
the question referred by the Tribunal,
provided the question is couched in terms of
sufficient amplitude to cover an enquiry into
the question in the light of the amended law,
and the enquiry does not necessitate
investigation of fresh facts. If the question
is not so couched as to invite the High Court
to decide the question in the light, of the
law as amended or if it necessitates
investigation of facts which have not been
investigated, the High Court may refuse to
answer the question. Application of the
relevant law to a problem raised by the
reference before the High Court is not
normally excluded merely because at the date
when the Tribunal decided the question the
relevant law was not or could not be brought
to its notice."
Therefore, following this judgment, we must hold that Mr.
Sastri is entitled to rely on the 1962 order and it is our
duty to answer the reference in accordance with the
amendment made by the order, unless the question referred is
not couched in terms of ,sufficient amplitude to cover an
enquiry into the question in the light of the amended law.
Mr. Desai then raises two questions in respect of the order.
First he says that it is the first time that the order is
being relied on in these proceedings and he is entitled to
urge before us that
(1) [1964]7 S.C.R. 383. A.I.R. 1964 S.C. 1594.
889
the order is bad. He has given a number of reasons in
support of his plea that the order is ultra vires, but in
view of the decision of this Court in K. S. Venkataraman v.
State of Madras(1), we refused to allow him to develop these
objections. We may mention that he seeks to distinguish
Venkataraman’s(1) case on the ground that the Supreme Court
and the High Court are not creatures of the order which he
was impugning. He further says that the Appellate Tribunal
would also have been entitled to go into the question of the
validity because the order is not part of the Income Tax
Act, and it is not the creature of the order in the sense
mentioned in Venkataraman’s(1) case. We are not able to
sustain the distinction sought to be made by Mr. Desai. The
order is in effect an amendment of the Indian Income Tax Act
insofar as it is applicable to the merged States. If it had
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not been for the order, only the provisions of s. 10(5) of
the Act would have been applied for the purpose of working
out depreciation. Now, in view of the Taxation Laws (Merged
States) (Removal of Difficulties) Order, 1949, as explained
by the 1962 order, a different rule has been directed to be
applied and the Income Tax Officer is bound to follow this
statutory direction. We are unable to see how the judgment
in Venkataraman’s case does not apply.
Mr. Desai then contends that the 1962 order did not apply to
this case because income of the assessee had not been
exempted under the agreement with the ruler. He says that
the words "exempted from tax" in the 1962 order mean that
the assessee must have been liable to pay tax and then
exemption granted. He points to the definition of the word
"assessee" in the Bhopal Income Tax Act, 1936 (VIII of
1936), which has been defined as "a person by whom income
tax is payable." Then he refers to the charging section the
relevant part of which reads as follows :
"3. Whereby a notification in the jarida the
Government declares that income-tax shall be
charged for any year at any rate or rates
applicable to the total income of an assessee,
tax .... "
He says that the respondent was not an assessee because
under the agreement no income tax was payable by it and for
this reason no notice or assessment had been made under the
Bhopal Income Tax Act. We are unable to sustain this
contention. The definition of ’assessee’ must mean a person
by whom income tax is payable under the Bhopal Act. If it
had not been for the agree-
(1) [1966] 2 S.C.R. 229.
890
ment, the respondent would have been liable to pay tax and
it is the agreement alone which exempted it from taxation.
Mr. Desai then contends that the 1962 order is not
retrospective and does not apply to assessments made before
the order came into force. We see no force in this
contention because the terms of the order are plain and if
it is deemed, as directed by the order, that the expression
"actually allowed under any laws or rules of a merged State"
should have the meaning ascribed to it by the Explanation,
as from December 3, 1949, when the Taxation Laws (Merged
States) (Removal of Difficulties) Order, 1949, came into
force, the Explanation must apply to the assessments for the
year 1952-53 and 1953-54.
Lastly, Mr. Desai contends that the question referred to the
High Court in this case is not couched in terms of
sufficient amplitude to cover the points he has tried to
make, namely, whether the order dated August 22, 1962, is
retrospective and whether the assessee is covered by the
terms of cl. (b) of the Explanation. Looking at the
question it seems to us that the substance of the question
which was referred was whether the view held by the Income
Tax Officer or the Appellate Assistant Commissioner was
right, and the words "having regard to" occurring in the
question did not have the effect of restricting the laws
that could be considered for answering the question. It may
also be said that when paragraph 2 of the Taxation Laws
(Merged States) (Removal of Difficulties) Order, 1949, is
referred to, it would include paragraph 2 as amended
retrospectively. We must, therefore, overrule Mr. Desai’s
objection and hold that the question framed by the Appellate
Tribunal is wide enough to include a discussion of the
amendments made retrospectively in the Taxation Laws (Merged
States) (Removal of Difficulties) Order, 1949.
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In conclusion, applying the 1962 order to the facts of this
,case it is clear that the answer to the question referred
must be that the correct basis for computing the written
down value of the depreciable assets as on November 1, 1948,
is the one which was adopted by the Income Tax Officer. In
the result, the appeals are accepted, the judgment of the
High Court set aside and the question answered as indicated
above. In the circumstances of the ,case the parties will
bear their own costs.
Appeals allowed.
891